Is Bros Eastern.Ltd (SHSE:601339) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Bros Eastern.,Ltd (SHSE:601339) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Bros Eastern.Ltd

What Is Bros Eastern.Ltd's Net Debt?

As you can see below, at the end of March 2024, Bros Eastern.Ltd had CN¥5.81b of debt, up from CN¥5.20b a year ago. Click the image for more detail. However, it also had CN¥3.10b in cash, and so its net debt is CN¥2.71b.

How Strong Is Bros Eastern.Ltd's Balance Sheet?

We can see from the most recent balance sheet that Bros Eastern.Ltd had liabilities of CN¥5.05b falling due within a year, and liabilities of CN¥1.49b due beyond that. Offsetting this, it had CN¥3.10b in cash and CN¥747.0m in receivables that were due within 12 months. So its liabilities total CN¥2.70b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Bros Eastern.Ltd has a market capitalization of CN¥7.19b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Bros Eastern.Ltd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Bros Eastern.Ltd wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to CN¥7.3b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Bros Eastern.Ltd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥30m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥977m and the profit of CN¥500m. So one might argue that there's still a chance it can get things on the right track. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Bros Eastern.Ltd that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com